A. Distribution of Income
The aim of a tax system to raise revenue for the government, with two objectives in
mind: efficiency and equity. But taxes distort incentives, so they cause deadweight losses,
reduction in economic well-being of taxpayers in excess of the amount of revenue raised
by the government. The deadweight loss is the inefficiency that a tax creates as people
allocate resources according to the tax incentive rather than the true costs and benefits of
the good and services that they buy and sell.
a. Direct taxation
i. Tax levied (imposed) directly on an individual or organization
levied on goods when they are purchased. Nearly all direct taxes
are taxes on income or wealth
ii. Example: income tax, capital gain tax, or corporation tax.
b. Indirect taxation
i. A tax that increases the price of a good so that consumers are
actually paying the tax by paying more for the products.
ii. Example: Fuel, liquor and cigarette taxes
c. Progressive taxation
i. High income taxpayers pay a larger fraction of their income
d. Proportional taxation
i. All taxpayers pay a smaller fraction of their income
Regressive Tax:
A tax which is regressive… Just kidding. A regressive tax is a tax which places a
larger percent of the burden of taxation on those with lower incomes than on those with
higher incomes. Under a regressive tax system as the amount being taxed increases the
tax rate decreases and conversely as the amount being taxed decreases the tax rate
increases. Regressive taxation is largely criticized for being unfairly biased towards
wealthy individuals and placing a much larger burden, relative to income, on those less
able to bear it. A regressive tax cannot so much be based on an actual percent tax but can
also be based on propensity to engage in the taxed activity. That means that taxed
activities which lower income persons are more likely to engage in than higher income
persons are technically regressively taxed. Property tax is commonly considered an
example of a regressive tax as higher income persons tend to own substantially more
property and pay a substantially smaller portion of their income in property tax.
Transfer Payments:
A transfer payment is a payment of money by the government. Transfer payments
could more or less be considered a gift by the government as they are not a part of an
exchange. Nothing is being given by the individual for the transfer payment therefore it is
more or less a gift. Transfer payments are often criticized as being a form of income
redistribution. Examples of transfer payments include welfare, student scholarship grants,
and social security benefits.
Laffer Curve:
The Laffer Curve is a curve in economics which is used to illustrate the idea that
increases in tax rate does not necessarily increase tax revenue. The curve shows that at a
100% tax rate there will be NO tax revenue as people have no incentive to earn money
because it will all be taxed and taken from them. There is a peak point on the curve which
illustrates the amount of tax which will generate the maximum revenue. The ideal
situation, both for taxer and taxee would be for taxation to be set at this level as it will be
most beneficial to both parties involved.
The Laffer curve is shown below.
Government Revenue
0
Tax Rate (percent)
100
Lorenze Curve:
The lorenze curve is a visual representation of the equality of the
distribution of income in a country. The straighter the lorenze curve the more
proportionally the income is distributed. This means that the ideal would be a straight line
which would mean that 20% of the population would have 20% of the income 30%
would have 30% and so on. The lorenze curve sadly is generally used to measure
economic inequality.
% Income
Perfect Equality
Actual Distribution
0
% Population
100
Gini Coefficent:
The Gini coefficient is a statistical representation of the equality of income
distribution within a country. The Gini coefficient is a number between 0 and 1.The
lower the Gini coefficient the more equal the distribution of income. The closer to 1 the
coefficient the less equal the distribution. In the world today some of the countries with
the most equal income distribution, such as Denmark, have coefficients of .232.
Countries such as Namibia with some of the least equitable distributions of income have
coefficients of .707.
Recovering Alcoholics, Disabled Want Alcohol Tax in Maryland
Raised
http://www.news8.net/news/stories/0309/604293.html
Bills moving through the Maryland legislature want to add five cents onto
alcohol and distilled spirits purchases. The increase in this indirect tax would raise
the state $80 million, but family members say more importantly, it will provide help
for those in need. The advocates are urging to increase the state excise tax as a way
to generate funds for almost 19,000 residents in need of support services. It is true
that an increase in taxes would raise government revenue for Maryland, but the
taxes can cause inefficiencies because the buyers pay above the equilibrium price.
This increase in price would cause consumers to purchase less, but this might be
beneficial to the society because it would discourage many to consume less alcohol,
and it might hurt the producers. The tax on alcohol also creates dead weight loss in
the economy, causing the market to be less efficient.